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EURUSD Up or Down...Growth, Stimulus and Risk Trends

EURUSD Up or Down...Growth, Stimulus and Risk Trends

John Kicklighter, Chief Strategist

Russell 2000, S&P 500, Oil, Bitcoin and EURUSD Talking Points:

  • The Russell 2000 led another day’s hearty decline with the Nasdaq and other risk assets tagging along – though relative risk off is still the theme at hand
  • Top thematic event risk this past session was the run of developed economy PMIs for March which signaled background economic growth – though it didn’t help markets
  • While retail trader appetite, stimulus and monetary policy are active themes ahead; monetary policy is top listing with three rate decisions and heavy central banker speak
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Risk Aversion Is Gaining Traction – But Enough for a True Trend?

We have seen risk aversion creep into the markets this week, but the isolated pockets and general reticence to contradict the complacent bullish bias (‘buy the dip’, ‘diamond hands’, ‘laser eyes’, etc) is starting to grow dangerously transparent. Given that everything in the markets is a probability, my gauge for something as ubiquitous but abstract as sentiment is the breadth and depth of conviction. In other words, how many of the liquid market benchmarks that have a connection to risk on/off are aligning and how intense is their run. The stronger those two elements, the greater the probability of a self-sustaining trend. This past session, the major US indices were all in the red and the frequent pace setter of the past years, the Nasdaq 100 suffered a steeper -1.7 percent slide. The biggest hit for a second day in a row though was the small cap Russell 2000 with a -2.4 percent drop. It seems retail is fading despite the most recent stimulus working its way into the system.

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Chart of Russell 2000 with 100-Day Moving Average and 3-Day Rate of Change (Daily)

EURUSD Up or Down...Growth, Stimulus and Risk Trends

Chart Created on Tradingview Platform

Looking more broadly across the spectrum, not all of the risk measures I follow were down. That said, the exceptions say as much about what is motiving sentiment and its trouble moving forward as the different pacing for the markets actually losing altitude. Crude oil as a growth-sensitive risk measure was leaning on a supply-demand factor and the volatility it has exhibited does little to genuinely bolster confidence. Meanwhile, junk bond ETFs (like HYG) edge higher, but the lack of pacing suits the underlying recognition that earnest rates of return are not playing a role in this capital gains world. Alternatively, global equities, carry trade and emerging markets were all taking a hit. If you want to dig into the disparity, the recent retail interests were the most put upon with GameStop standing out in particular on a -34 percent drop following its earnings miss. It seems the ‘diamond hands’ call in Reddit boards is giving way to normal risk-reward assessments.

Chart of 12-Month Performance of EURUSD, Crude Oil, EEM, S&P 500, VEU and HYG (Daily)

EURUSD Up or Down...Growth, Stimulus and Risk Trends

Chart Created on Tradingview Platform

The Fundamental Themes Worthy of Headlines and Those Generating Volatility

Convenience plays a serious role in many market participants analysis. Yet, unfortunately, the straightforward technicals and fundamentals aren’t always the matters that are truly moving markets. For economic punch, the run of advanced March PMIs for major developed world economies this past session signaled a favorable wind for recovery. The only economy to see its number tick lower was the US, but it was still pacing the pack at that slightly reduced level. Every other major reading improved. That didn’t help sentiment however – nor did it seem to define the relative performance of these markets via exchange rates. The retail slump on the other hand seemed to be exerting its negative influence. Beyond the heavily shorted stocks of WallStreetBets fame these past few months, the slide in short-term options activity, slide in small caps relative to industrials and retreat of search interest for newbie trading engagement (eg “how to buy stocks”) suggests the flash-in-the-pan contribution to risk trends in January may be spent.

Chart of Major Economies Composite PMIs (Daily)

EURUSD Up or Down...Growth, Stimulus and Risk Trends

Chart Created by John Kicklighter with Data from Markit

Going back to the considerations of risk trends, relative growth, stimulus that has fed the rise of retail and yields as by-product; there is a remarkable barometer in EURUSD. One of the most frequently asked questions we receive in webinars is the very open-ended “EURUSD go up or down?” Rarely does the question even come with an auxiliary verb like ‘will’ or ‘can’. This request for a straight trade recommendation isn’t answered for a number of reasons, but pronounced is the issue that the person requesting isn’t even thinking about the terms of the scenario. What is the time frame, risk constraints, levels, probabilities and additional qualifications? You can be right on direction but still readily fail to place a profitable trade if not managed properly.

Yet beyond that segue, the most liquid currency pair in the market – and by extension one of the most active assets in the entire financial system – represents more than a few of the competing themes currently fighting for our attention. The spread in growth between the Eurozone and US PMIs closed the gap against the former but the latter is still pacing. Further, the stimulus program is still winding its way through the US with talks of infrastructure spending still picking up. For yields, Fed Fund rate hike expectations are still elevated with the US 10-year handily outpacing German counterparts. Keep tabs, on progress for EURUSD down to the 1.1600 level, but its worth noting that the pair closed below its 200-day moving average for the first time in 212 trading days Wednesday.

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Chart of EURUSD with 200-Day Moving Average Overlaid with German-US 10 Year Yield (Daily)

EURUSD Up or Down...Growth, Stimulus and Risk Trends

Chart Created on Tradingview Platform

Big Movers and Big Event Risk

Looking ahead to Thursday trade, there are a few markets for which I want to keep close tabs on. Besides the implications for the Russell 2000, the volatility in crude oil and the beating the New Zealand Dollar took after the monetary policy shift can still urge some technically-meaningful developments. Yet, one of the highlights on the tech side with a lot of speculative expectation is Bitcoin’s slide through 53,350. The cryptocurrency broke its most recent, fever-like rally and now faces its 50-day moving average. Why that is remarkable is that influencer Elon Musk – founder of Tesla and a catalyst for gains in BTC in recent months – offered news that would have triggered bulls in January. He reported that his company was now accepting bitcoin to purchase their electric cars and that the firm would buy more of the cryptocurrency. It offered limited inspiration – though I don’t think the BIS suggestion it should be regulated or Dalio’s warning of crackdown really urged the correction. Watch that 50 SMA (simple moving average).

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Chart of Bitcoin with 50-Day Moving Average Overlaid with Tesla (Daily)

EURUSD Up or Down...Growth, Stimulus and Risk Trends

Chart Created on Tradingview Platform

For theme on the docket Thursday, monetary policy will take more traction. This has not been a lacking consideration as there has been remarkable speculation around the pressure on central banks to withdrawal support or face an overheated economy – or worse, the loss of confidence in their persistent support system. We have seen very subtle efforts to moderate the extremes of monetary policy this past week with liquidity cuts from the Fed, Bank of Japan, Bank of Canada and to an extent the Reserve Bank of New Zealand. Keep tabs to see if the Swiss National Bank, South African Reserve Bank or Central Bank of Mexico follow suit Thursday. Also, a host of key voices from the world’s largest central banks are on tap to discuss strategy in monetary policy going forward.

Chart WTI Crude Oil with 20 and 50-Day Moving Averages and Volume

EURUSD Up or Down...Growth, Stimulus and Risk Trends

Chart Created on Tradingview Platform

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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